Self-employed pensions: millions not saving enough in contributions


Updated on 07 April 2016 | 5 Comments

Self-employed aren't saving enough for their retirement, risking their standard of living after work.

New figures from the Office for National Statistics (ONS) have revealed a shocking lack of pension provision among Britain's self-employed workforce. 

According to the latest data from the ONS, only 420,000 self-employed workers currently pay into a private pension. This means that only around one in 11 self-employed Brits pays anything at all towards retirement saving, a shockingly low participation rate.

The 'forgotten workers' for pension provision

The number of self-employed Brits has been soaring in recent years. Since 2009, 1.7 million workers have taken up self-employment, around 37% of the current total. Last year, 4.6 million Brits were self-employed; the highest number since records began.

But the terrible levels of pension saving present a huge problem, not just for individual workers, but also welfare problems for the state and future taxpayers.

Part of the problem is that they are excluded from auto-enrolment, the Government's scheme which forces employers to open and then contribute to a pension for their employees. For a full guide to how it works, read Workplace pensions: what it means for you.

Tom McPhail, head of retirement policy at financial firm Hargreaves Lansdown, pulls no punches, warning: "Britain's self-employed are becoming the 'forgotten workers', left behind by the auto-enrolment system. Auto-enrolment is working its magic for millions of employees but, in the meantime, the self-employed have been all but forgotten by policymakers."

[SPOTLIGHT]He goes on to explain, "The two key elements of auto-enrolment are the default membership of a private pension and the benefit of employer contributions. It may be that the only way to deliver these benefits for the self-employed is through the tax and National Insurance system. Many of these self-employed workers are unused to having to make their own pension provision. Without an employer to help them, they would benefit enormously from some form of government intervention."

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Pension provision is easier for employees

Clearly, there is a massive gulf in both pension participation and savings rates between British employees and self-employed workers. 

Speaking from experience, I've encountered huge differences in pension provision during my career. During the Nineties and early Noughties, I worked for a string of financial firms, all of which provided me with generous and guaranteed final-salary pension schemes. Obviously, I keep in contact with each scheme's trustees, as these pensions will one day be worth several thousands of pounds a year to me.

However, for the past 10 years, I have worked for myself, first via my own private limited company and, since the summer of 2013, as a self-employed freelancer. It is during this decade that my pension provision became markedly more difficult. Indeed, I've seen first-hand how, without the financial support and contributions offered by employers, pension provision gets a whole lot harder.

Open a SIPP today

Pensions for the self-employed

From my personal experience, the best way to deal with individual pension provision is to be flexible.

When my income has been at its highest, I have elected to put between 15% and 100% of my earned income into pensions. However, when things have been tighter, I have chosen not to contribute to pensions at all. Thankfully, there have been more good years than bad, which allows me to take year-long 'pension holidays' as and when I need to.

Also, I know that retirement saving is not purely about pensions. The UK's second-most popular savings vehicle after pensions is the tax-free ISA, into which British adults can pay in up to £15,240 in this 2015/16 tax year. I know of many self-employed workers that don't pay into pensions, preferring instead to invest in their future via ISAs and other tax-advantaged savings vehicles.

In addition, when paying into my own pension plans, I have looked for private pensions that combine low charges with investment control, freedom and flexibility. I prefer to choose and manage my own investments, which is why my vehicle of choice for retirement saving is a low-cost Self-Invested Personal Pension (SIPP). With no or low penalties for stopping or starting contributions, SIPPs are often the first-choice tax haven for self-employed workers.

Open a SIPP today

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